CALGARY, ALBERTA–(Marketwired – Jul 31, 2014) – Canadian Oil Sands Limited (TSX:COS)(OTCQX:COSWF) -
All financial figures are unaudited and in Canadian dollars unless otherwise noted.
“This was a challenging quarter given overlapping outages on two of our three cokers; however, we are pleased that Syncrude executed the maintenance work safely and efficiently, with the final unit returning to service by early July,” said Ryan Kubik, President and Chief Executive Officer. “Syncrude is now focused on a return to more stable operations and the completion of the Mildred Lake Mine Train Replacement project, which remains on budget and is on track to start up in the fourth quarter of the year.”
Highlights for the three months ended June 30, 2014:
Cash flow from operations for the quarter was $ 240 million ($ 0.50 per Share) compared with $ 340 million ($ 0.70 per Share) in the same quarter of 2013 as higher realized selling prices and lower current taxes partially offset the impact of lower sales volumes.
Net income of $ 176 million ($ 0.36 per Share) was recorded for the quarter compared with $ 219 million ($ 0.45 per Share) in the second quarter of 2013. The decrease in net income reflects lower sales volumes and higher Crown royalties, partially offset by a higher realized selling price and foreign exchange gains on long-term debt in 2014 as opposed to foreign exchange losses in 2013.
Sales volumes for the quarter averaged 77,064 barrels per day, down from 100,094 barrels per day in the comparative 2013 quarter due to an unplanned outage of Coker 8-1 and the planned turnaround of Coker 8-2.
Operating expenses were $ 418 million in the second quarter of 2014 compared with $ 394 million the same quarter of 2013; the increase was due mainly to maintenance costs associated with the unplanned outage of Coker 8-1, higher natural gas prices, as well as an increase in the value of Syncrude’s long-term incentive plans. On a per barrel basis, operating expenses in the second quarter of 2014 increased to $ 59.64 from $ 43.23 during the same period of 2013, reflecting the impact of lower sales volumes on a high proportion of fixed operating expenses.
The Mildred Lake Mine Train Replacement project reached an estimated 94 per cent completion and is on schedule to be in service during the fourth quarter of this year.
The Centrifuge Tailings Management project reached an estimated 85 per cent completion and is on schedule to be in service during the first half of 2015.
COS declared a quarterly dividend of $ 0.35 per Share, payable on August 29, 2014 to shareholders of record on August 22, 2014.
Highlights
Three Months Ended
Six Months Ended
June 30
June 30
2014
2013
2014
2013
Cash flow from operations1($ millions)
$
240
$
340
$
597
$
615
Per Share1($ /Share)
$
0.50
$
0.70
$
1.23
$
1.27
Net income ($ millions)
$
176
$
219
$
348
$
396
Per Share, Basic and Diluted ($ /Share)
$
0.36
$
0.45
$
0.72
$
0.82
Sales volumes2
Total (mmbbls)
7.0
9.1
16.5
17.7
Daily average (bbls)
77,064
100,094
91,095
97,901
Realized SCO selling price ($ /bbl)
$
112.04
$
100.90
$
108.40
$
98.56
West Texas Intermediate (“WTI”) (average $ US/bbl)
$
102.99
$
94.17
$
100.84
$
94.26
SCO premium (discount) to WTI (weighted average $ /bbl)
$
(0.37
)
$
4.69
$
(1.85
)
$
2.85
Average foreign exchange rate ($ US/$ Cdn)
$
0.92
$
0.98
$
0.91
$
0.98
Operating expenses ($ millions)
$
418
$
394
$
863
$
749
Per barrel ($ /bbl)
$
59.64
$
43.23
$
52.33
$
42.24
Capital expenditures ($ millions)
$
321
$
369
$
538
$
637
Dividends ($ millions)
$
169
$
169
$
339
$
339
Per Share ($ /Share)
$
0.35
$
0.35
$
0.70
$
0.70
1Cash flow from operations and cash flow from operations per Share are additional GAAP financial measures and are defined in the “Additional GAAP Financial Measures” section of our Management’s Discussion and Analysis (“MD&A”).
2The Corporation’s sales volumes differ from its production volumes due to changes in inventory, which are primarily in-transit pipeline volumes. Sales volumes are net of purchases.
2014 Outlook
Canadian Oil Sands provides the following key estimates and assumptions for 2014:
Our estimate of 2014 sales, net of crude oil purchases and transportation expense, has increased to $ 3,649 million, primarily reflecting a higher than expected realized selling price for the first six months of 2014.
We have revised our Syncrude production range to 95 to 102 million barrels, reducing the top end by three million barrels to reflect actual results to the end of July, including outages on sulphur processing units. We are maintaining the single-point estimate of 100 million barrels (36.7 million barrels net to COS), which assumes Syncrude production averages about 310,000 barrels per day for the remainder of the year. That production rate is supported by the expectation of robust operating performance from Cokers 8-1 and 8-2, given their recently completed maintenance, and an efficient start-up of the Mildred Lake mine trains in the fourth quarter.
Operating expenses are estimated at $ 1,680 million, or an average of $ 45.73 per barrel.
Based on these assumptions, our estimated cash flow from operations has increased to $ 1.3 billion, or $ 2.76 per Share.
We also expect net debt to remain within our targeted range of $ 1 billion to $ 2 billion at year end, coincident with the substantial completion of our major projects.
More information on the outlook is provided in our MD&A and the July 31, 2014 guidance document, which is available on our web site at www.cdnoilsands.com under “Investor Centre”.
The 2014 Outlook contains forward-looking information and users are cautioned that the actual amounts may vary from the estimates disclosed. Please refer to the “Forward-Looking Information Advisory” in the MD&A section of this report for the risks and assumptions underlying this forward-looking information.
Management’s Discussion and Analysis
The following Management’s Discussion and Analysis (“MD&A”) was prepared as of July 31, 2014 and should be read in conjunction with the unaudited consolidated financial statements and notes thereto of Canadian Oil Sands Limited (the “Corporation”) for the three and six months ended June 30, 2014 and June 30, 2013, the audited consolidated financial statements and MD&A of the Corporation for the year ended December 31, 2013 and the Corporation’s Annual Information Form (“AIF”) dated February 20, 2014. Additional information on the Corporation, including its AIF, is available on SEDAR at www.sedar.com or on the Corporation’s website at www.cdnoilsands.com. References to “Canadian Oil Sands”, “COS” or “we” include the Corporation, its subsidiaries and partnerships. The financial results of Canadian Oil Sands have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”) and are reported in Canadian dollars, unless otherwise noted.
Table of Contents
Advisories 3-5
Overview 6
Review of Operations 7
Review of Financial Results 7-12
Summary of Quarterly Results 13
Capital Expenditures 14
Contractual Obligations and Commitments 14
Dividends 14
Liquidity and Capital Resources 15
Shareholders’ Capital and Trading Activity 16
2014 Outlook 16-17
Major Projects 18
Advisories
Forward-Looking Information
In the interest of providing the Corporation’s shareholders and potential investors with information regarding the Corporation, including management’s assessment of the Corporation’s future production and cost estimates, plans and operations, certain statements throughout this MD&A and the related press release contain “forward-looking information” under applicable securities law. Forward-looking statements are typically identified by words such as “anticipate”, “expect”, “believe”, “plan”, “intend” or similar words suggesting future outcomes.
Forward-looking statements in this MD&A and the related press release include, but are not limited to, statements with respect to: the expectations regarding the 2014 annual Syncrude forecasted production range of 95 million barrels to 102 million barrels and the single-point Syncrude production estimate of 100 million barrels (36.7 million barrels net to the Corporation); the intention to fund the Syncrude major projects primarily with cash flow from operations; the establishment of future dividend levels with the intent of absorbing short-term market volatility over several quarters; the expected sales, operating expenses, purchased energy costs, development expenses, Crown royalties, capital expenditures and cash flow from operations for 2014; the anticipated amount of current taxes in 2014; expectations regarding the Corporation’s cash levels for 2014; the expected price for crude oil and natural gas in 2014; the expected foreign exchange rates in 2014; the expected realized selling price, which includes the anticipated differential to West Texas Intermediate (“WTI”) to be received in 2014 for the Corporation’s product; the expectations regarding net debt; the anticipated impact of increases or decreases in oil prices, production, operating expenses, foreign exchange rates and natural gas prices on the Corporation’s cash flow from operations; the belief that fluctuations in the Corporation’s realized selling prices, U.S. to Canadian dollar exchange rate fluctuations, planned and unplanned maintenance activities, changes in bitumen values, changes in natural gas prices and current taxes may impact the Corporation’s financial results in the future; the expectation that the major projects will be substantially complete by the end of 2014, reducing future capital expenditures and increasing future Crown royalties and net finance expenses; the expected amount of total major project costs, anticipated target in-service dates and estimated completion percentages for the Mildred Lake mine train replacements and the centrifuge plant at the Mildred Lake mine; the cost estimates for 2014 and 2015 major project spending; the estimate that regular maintenance capital costs for the next few years should be similar to 2014; and the estimate of prospective resources impacted by the exercise of the option on a portion of Leases 29 and 31 by certain third parties.
You are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Although the Corporation believes that the expectations represented by such forward-looking statements are reasonable and reflect the current views of the Corporation with respect to future events, there can be no assurance that such assumptions and expectations will prove to be correct.
The factors or assumptions on which the forward-looking information is based include, but are not limited to: the assumptions outlined in the Corporation’s guidance document as posted on the Corporation’s website at www.cdnoilsands.com as of July 31, 2014 and as subsequently amended or replaced from time to time, including without limitation, the assumptions as to production, operating expenses and oil prices; the successful and timely implementation of capital projects; Syncrude’s major project spending plans; the ability to obtain regulatory and Syncrude joint venture owner approval; our ability to either generate sufficient cash flow from operations to meet our current and future obligations or obtain external sources of debt and equity capital; the continuation of assumed tax, royalty and regulatory regimes and the accuracy of the estimates of our reserves and resources volumes.
Some of the risks and other factors which could cause actual results or events to differ materially from current expectations expressed in the forward-looking statements contained in this MD&A and the related press release include, but are not limited to: volatility of crude oil prices; volatility of the synthetic crude oil (“SCO”) to WTI differential; the impact that pipeline capacity and apportionment and refinery demand have on prices for SCO and the ability to deliver SCO; the impacts of regulatory changes especially those which relate to royalties, taxation, tailings, water and the environment; the impact of new technologies on the cost of oil sands mining; the impacts of rising costs associated with tailings and water management; the inability of Syncrude to obtain required consents, permits or approvals, including without limitation, the inability of Syncrude to obtain approval to release water from its operations; the impact of Syncrude being unable to meet the conditions of its approval for its tailings management plan under Directive 074; various events which could disrupt operations including fires, equipment failures and severe weather; unsuccessful or untimely implementation of capital or maintenance projects; the impact of technology on operations and processes and how new complex technology may not perform as expected; the obtaining of required owner approvals from the Syncrude owners for expansions, operational issues and contractual issues; labour turnover and shortages and the productivity achieved from labour in the Fort McMurray area; uncertainty of estimates with respect to reserves and resources; the supply and demand metrics for oil and natural gas; currency and interest rate fluctuations; volatility of natural gas prices; the Corporation’s ability to either generate sufficient cash flow from operations to meet its current and future obligations or obtain external sources of debt and equity capital; the inability of the Corporation to continue to meet the listing requirements of the Toronto Stock Exchange; general economic, business and market conditions and such other risks and uncertainties described in the Corporation’s AIF dated February 20, 2014 and in the reports and filings made with securities regulatory authorities from time to time by the Corporation which are available on the Corporation’s profile on SEDAR at www.sedar.com and on the Corporation’s website at www.cdnoilsands.com.
You are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the forward-looking statements contained in this MD&A and the related press release are made as of July 31, 2014, and unless required by law, the Corporation does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD&A and the related press release are expressly qualified by this cautionary statement.
Additional GAAP Financial Measures
In this MD&A and the related press release, we refer to additional GAAP financial measures that do not have any standardized meaning as prescribed by Canadian GAAP. Additional GAAP financial measures are line items, headings or subtotals in addition to those required under Canadian GAAP, and financial measures disclosed in the notes to the financial statements which are relevant to an understanding of the financial statements and are not presented elsewhere in the financial statements. These measures have been described and presented in order to provide shareholders and potential investors with additional measures for analyzing our ability to generate funds to finance our operations and information regarding our liquidity. Users are cautioned that additional GAAP financial measures presented by the Corporation may not be comparable with measures provided by other entities.
Additional GAAP financial measures include: cash flow from operations, cash flow from operations per Share, net debt, total net capitalization, total capitalization, net debt-to-total net capitalization and long-term debt-to-total capitalization.
Cash flow from operations is calculated as cash from operating activities before changes in non-cash working capital. Cash flow from operations per Share is calculated as cash flow from operations divided by the weighted-average number of Shares outstanding in the period. Because cash flow from operations and cash flow from operations per Share are not impacted by fluctuations in non-cash working capital balances, we believe these measures are more indicative of operational performance than cash from operating activities. With the exception of current taxes, liabilities for Crown royalties and the current portion of our asset retirement obligation, our non-cash working capital is liquid and typically settles within 30 days.
Cash flow from operations is reconciled to cash from operating activities as follows:
Three Months Ended
Six Months Ended
June 30
June 30
($ millions)
2014
2013
2014
2013
Cash flow from operations1
$
240
$
340
$
597
$
615
Change in non-cash working capital1
30
121
(449
)
175
Cash from (used in) operating activities1
$
270
$
461
$
148
$
790
1As reported in the Consolidated Statements of Cash Flows.
Net debt, total net capitalization, total capitalization, net debt-to-total net capitalization and long-term debt-to-total capitalization are used by the Corporation to analyze liquidity and manage capital, as discussed in the “Liquidity and Capital Resources” section of this MD&A and in Note 12 to the unaudited consolidated financial statements for the three and six months ended June 30, 2014.
Overview
During the second quarter of 2014, Syncrude performed a scheduled turnaround on Coker 8-2 and had an unplanned outage on Coker 8-1 to remove coke deposits. Both cokers were off-line concurrently for a period during the second quarter while Syncrude performed the necessary work. Syncrude’s production was 18.5 million barrels during the second quarter of 2014, in line with our revised April 30, 2014 guidance, but lower relative to 2013 mainly as a result of the additional maintenance activities relating to the cokers.
Commodity prices have remained strong with WTI averaging approximately U.S. $ 103 per barrel for the second quarter of 2014. Canadian Oil Sands’ sales benefited from both the strong commodity prices and a weaker Canadian dollar, resulting in a better than expected realized selling price of $ 112 per barrel for the second quarter and $ 108 per barrel on a year-to-date basis.
Syncrude’s two remaining major capital projects are progressing as planned and are on time and budget. As at June 30, 2014 the Mildred Lake Mine Train Replacement project is estimated to be 94 per cent complete and the Centrifuge Tailings Management project is estimated to be 85 per cent complete. The new Mildred Lake mine trains are expected to begin operations in the fourth quarter of 2014 and the Centrifuge Tailings Management project is expected to be in service in the first half of 2015.
We have revised our 2014 Outlook and increased our estimated 2014 cash flow from operations by approximately $ 150 million to $ 1.3 billion. This reflects a higher estimated realized selling price of $ 99 per barrel for 2014. We have revised our Syncrude production range to 95 to 102 million barrels, reducing the top end by three million barrels to reflect actual results to the end of July, including outages on sulphur processing units. We are maintaining the single-point estimate of 100 million barrels (36.7 million barrels net to COS), which assumes Syncrude production averages about 310,000 barrels per day for the remainder of the year. That production rate is supported by the expectation of robust operating performance from Cokers 8-1 and 8-2, given their recently completed maintenance, and an efficient start-up of the Mildred Lake mine trains in the fourth quarter.
Highlights
Three Months Ended
Six Months Ended
June 30
June 30
2014
2013
2014
2013
Cash flow from operations1($ millions)
$
240
$
340
$
597
$
615
Per Share1
$
0.50
$
0.70
$
1.23
$
1.27
Net income ($ millions)
$
176
$
219
$
348
$
396
Per Share, Basic and Diluted
$
0.36
$
0.45
$
0.72
$
0.82
Sales volumes2
Total (mmbbls)
7.0
9.1
16.5
17.7
Daily average (bbls)
77,064
100,094
91,095
97,901
Realized SCO selling price ($ /bbl)
$
112.04
$
100.90
$
108.40
$
98.56
West Texas Intermediate (“WTI”) (average $ US/bbl)
$
102.99
$
94.17
$
100.84
$
94.26
SCO premium (discount) to WTI (weighted average $ /bbl)
$
(0.37
)
$
4.69
$
(1.85
)
$
2.85
Average foreign exchange rate ($ US/$ Cdn)
$
0.92
$
0.98
$
0.91
$
0.98
Operating expenses ($ millions)
$
418
$
394
$
863
$
749
Per barrel ($ /bbl)
$
59.64
$
43.23
$
52.33
$
42.24
Capital expenditures ($ millions)
$
321
$
369
$
538
$
637
Dividends ($ millions)
$
169
$
169
$
339
$
339
Per Share ($ /Share)
$
0.35
$
0.35
$
0.70
$
0.70
1Cash flow from operations and cash flow from operations per Share are additional GAAP financial measures and are defined in the “Additional GAAP Financial Measures” section of this MD&A.
2The Corporation’s sales volumes differ from its production volumes due to changes in inventory, which are primarily in-transit pipeline volumes. Sales volumes are net of purchases.
Review of Operations
During the second quarter of 2014 Syncrude produced 18.5 million barrels, or 202,500 barrels per day, compared to 24.8 million barrels, or 273,100 barrels per day in the second quarter of 2013. On a year-to-date basis, Syncrude produced 44.8 million barrels, or 247,200 barrels per day, in 2014 compared with 48.3 million barrels, or 266,800 barrels per day, in 2013. The decrease in Syncrude production in 2014 is primarily due to the unplanned Coker 8-1 outage and the planned Coker 8-2 turnaround.
Review of Financial Results
To view graph comparison, visit the following link: http://media3.marketwire.com/docs/959966.jpg
In the second quarter of 2014, cash flow from operations was $ 240 million, or $ 0.50 per Share, compared with $ 340 million, or $ 0.70 per Share, in the second quarter of 2013 as a result of lower sales volumes partially offset by a higher realized selling price and lower current taxes.
On a year-to-date basis, cash flow from operations decreased to $ 597 million, or $ 1.23 per Share, in 2014 from $ 615 million, or $ 1.27 per Share, in 2013 as a result of lower sales volumes, higher operating expenses and higher Crown royalties partially offset by a higher realized selling price and lower current taxes.
The changes in the components of cash flow from operations are discussed in greater detail later in this MD&A.
Net Income
Canadian Oil Sands reported net income of $ 176 million, or $ 0.36 per Share, in the second quarter of 2014 compared with $ 219 million, or $ 0.45 per Share, in the second quarter of 2013 as a result of lower sales volumes and higher Crown royalties partially offset by a higher realized selling price and foreign exchange gains in 2014 as opposed to foreign exchange losses in 2013.
On a year-to-date basis, net income decreased to $ 348 million, or $ 0.72 per Share, in 2014 from $ 396 million, or $ 0.82 per Share, in 2013 due to lower sales volumes, higher operating expenses and higher Crown royalties partially offset by a higher realized selling price and lower foreign exchange losses.
The changes in the components of net income are discussed in greater detail later in this MD&A.
The following table shows net income components per barrel of SCO.
Three Months Ended
Six Months Ended
June 30
June 30
($ per barrel)1
2014
2013
Change
2014
2013
Change
Sales net of crude oil purchases and transportation expense
$
112.06
$
100.96
$
11.10
$
108.03
$
98.63
$
9.40
Operating expense
(59.64
)
(43.23
)
(16.41
)
(52.33
)
(42.24
)
(10.09
)
Crown royalties
(5.78
)
(3.03
)
(2.75
)
(5.98
)
(2.86
)
(3.12
)
$
46.64
$
54.70
$
(8.06
)
$
49.72
$
53.53
$
(3.81
)
Development expense
$
(4.47
)
$
(4.16
)
$
(0.31
)
$
(3.86
)
$
(3.58
)
$
(0.28
)
Administration and insurance expenses
(1.38
)
(0.87
)
(0.51
)
(1.59
)
(1.31
)
(0.28
)
Depreciation and depletion expense
(15.97
)
(11.26
)
(4.71
)
(14.59
)
(12.68
)
(1.91
)
Net finance expense
(1.63
)
(1.30
)
(0.33
)
(1.51
)
(1.43
)
(0.08
)
Foreign exchange gain (loss)
7.11
(4.99
)
12.10
(0.29
)
(4.13
)
3.84
Tax expense
(5.06
)
(8.03
)
2.97
(6.72
)
(7.99
)
1.27
(21.40
)
(30.61
)
9.21
(28.56
)
(31.12
)
2.56
Net income per barrel
$
25.24
$
24.09
$
1.15
$
21.16
$
22.41
$
(1.25
)
Sales volumes (mmbbls)2
7.0
9.1
(2.1
)
16.5
17.7
(1.2
)
1Per barrel measures derived by dividing the relevant item by sales volumes in the period.
2Sales volumes, net of purchased crude oil volumes.
Net income components on a per barrel basis reflect the items noted above and lower sales volumes in 2014 relative to 2013.
Sales Net of Crude Oil Purchases and Transportation Expense
($ millions, except where otherwise noted)
Three Months Ended
Six Months Ended
June 30
June 30
2014
2013
Change
2014
2013
Change
Sales1
$
941
$
1,036
$
(95
)
$
2,055
$
1,997
$
58
Crude oil purchases
(141
)
(101
)
(40
)
(246
)
(224
)
(22
)
Transportation expense
(14
)
(14
)
-
(28
)
(24
)
(4
)
$
786
$
921
$
(135
)
$
1,781
$
1,749
$
32
Sales volumes2
Total (mmbbls)
7.0
9.1
(2.1
)
16.5
17.7
(1.2
)
Daily average (bbls)
77,064
100,094
(23,030
)
91,095
97,901
(6,806
)
Realized SCO selling price3
$
112.04
$
100.90
$
11.14
$
108.40
$
98.56
$
9.84
(average $ Cdn/bbl)
West Texas Intermediate (“WTI”)
$
102.99
$
94.17
$
8.82
$
100.84
$
94.26
$
6.58
(average $ US/bbl)
SCO premium (discount) to WTI
$
(0.37
)
$
4.69
$
(5.06
)
$
(1.85
)
$
2.85
$
(4.70
)
(weighted-average $ Cdn/bbl)
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